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Is there a structural break in equilibrium velocity in the euro area?

  • Christian Bordes

    ()

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)

  • Laurent Clerc

    (Direction de la Recherche - Banque De France - Banque de France)

  • Vêlayoudom Marimoutou

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université Paul Cézanne - Aix-Marseille 3 - Université de la Méditerranée - Aix-Marseille 2 - EHESS - École des hautes études en sciences sociales - CNRS - AMU - Aix-Marseille Université)

We investigate the stability of M3 income velocity in the euro area. We apply a set of breakpoint procedures to examine this issue and conclude that at least one structural change occurred around 2000-2001. We also ...nd evidence of another structural break around 1992-1993. These two breaks seem to a¤ect both the level and the slope of the income velocity of M3. We then estimate a model of equilibrium velocity that factors in the opportunity cost of M3, along the lines suggested by Orphanides and Porter (2000). Here again, we ...nd some evidence of instability in equilibrium velocity. Given the importance of the assumption of stable velocity trends for both the derivation of the reference value and the two-pillar strategy of the Eurosystem, these findings question the relevance of some excess liquidity indicators directly computed from the reference value and may call for some adjustments in the conduct of the ECB's monetary policy.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number hal-00308654.

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Date of creation: Feb 2007
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Handle: RePEc:hal:cesptp:hal-00308654
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00308654
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  1. Frederic S. Mishkin, 2007. "Monetary Policy Strategy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262134829, June.
  2. Beck, Günter & Wieland, Volker, 2007. "Money in Monetary Policy Design: A Formal Characterization of ECB-Style Cross-Checking," CEPR Discussion Papers 6097, C.E.P.R. Discussion Papers.
  3. Christian Bordes & Laurent Clerc, 2007. "Price Stability and the ECB'S monetary policy strategy," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00308557, HAL.
  4. Brun, Matthieu & Dreyfus, Alain & Avouyi-Dovi, Sanvi & Drumetz, Françoise & Oung, Vichett & Sahuc, Jean-Guillaume, 2005. "La fonction de demande de monnaie pour la zone euro : un réexamen," Economics Papers from University Paris Dauphine 123456789/5489, Paris Dauphine University.
  5. Jushan Bai & Pierre Perron, 2003. "Critical values for multiple structural change tests," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 72-78, 06.
  6. Carlson, John B. & Craig, Ben & Schwarz, Jeffrey C., 2000. "Structural uncertainty and breakpoint tests: an application to equilibrium velocity1," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 101-115.
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